Wednesday, September 8, 2010

Morning Update/ Market Thread 9/8

Good Morning,

Equity futures are slightly higher this morning after being lower overnight. The dollar is flat while the Yen touched a new high but has since fallen back. Also significant in the currency world, the Euro made a significant new low yesterday against the Swiss Franc as spreads once again widen in Europe over debt concerns. Oil and gold are mostly flat with gold still not able to get over the top of its prior high.

The worthless as ever MBA Purchase Applications Index supposedly rose 6.3% in the past week – riiight. Well, at least they admit that it’s still at an extreme low level that’s 40% below year ago levels, whatever that number is, they won’t say. What they did say is that the refinancing portion of the index fell 3.1%, and since right now refinancing is 82% of the transactions, the total index actually fell 1.5%. If they would report the actual numbers, it would be much more useful, but even with those, I do not trust the MBA (Mortgage Banker’s Association) or their data methods.

The Beige Book is released at 2 Eastern this afternoon for conditions through August, that may move the markets some, so be aware. International Trade and weekly Jobless Claims tomorrow is about as heavy as the data gets for this week.

In the 6 month daily chart of the SPX below you can see that prices failed to get over the 200 day moving average (red line), and also turned right on the upper boundary of the overall down channel (dashed green). The DOW perfectly touched the 200dma and immediately fell once again:

While yesterday’s action did produce bearish engulfing candles, especially bearish on the Russell 2000, it came on lower volume and was not a 90% down day. This tells me that this is likely not the beginning of wave 3 of 3 unless selling were to pick up heavily from here. It may not due to low volumes associated with this holiday shortened week. Volumes should pick up next week... however, overall volumes are down as I believe there are fewer players left in the market – a condition that is usually present at major tops as stocks consolidate into a few hands (computers). If the government (Fed via their surrogates) keeps defending DOW 10,000, eventually they would own ALL the shares (and that's not going to happen)!

We did receive the VIX market sell signal yesterday. This is one more indication to go along with all the other negative indicators, such as the valid Hindenburg Omen that will remain in effect until close to the end of the year even without receiving any more individual Omens. The VIX sell signal is reliable and should not be ignored.

Another indicator that should not be ignored is the CBOE put/call ratio that reached 1.33 at yesterday’s close. That is the highest reading since May of ’08, just prior to the waterfall that cascaded for the remainder of that year. In the three year chart below, note that usually extreme low readings mark the actual top, but that high readings usually correspond to bottoms however sometimes are seen in the area just after a major top forms. In other words, somebody is making large bearish bets, and sometimes they are right. Right now I don’t see other indications of extreme bearish sentiment that would otherwise mark a bottom:

What I do see is that our markets are lagging the Asian markets down. Below are charts of the Nikkei and the Shanghai indices verses the SPX (thin black line). Note the divergence, it is quite large:

Nikkei (Japan):

Shanghai (China):

Contrast those markets with Europe and Canada…




Based on yesterday’s low volume action, I suspect that we will remain range bound this week. I’m thinking it was most likely the start of wave b of 2 of 3. It could be over, but normally I would not consider it deep enough to finish a wave b movement. Thus I would normally think that this morning’s bounce is a subwave of wave b and will be met with more weak selling once very short term oversold conditions are worked off. It is possible, however, that yesterday was all of b and that wave c of 2 is underway. There is the turn window at the end of this week, so if we’re headed to a high by the end of this week, it’s going to have to move quickly.

The Rolling Stones - Tumblin' Dice: